Kira M. Slawson (7081)
BLACKBURN & STOLL, L.C.
Attorneys for Carbon/Emery Telcom, Inc.
257 East 200 South, Suite 800
Salt Lake City, Utah 84111
Telephone: (801) 521-7900
______________________________________________________________________________
BEFORE THE PUBLIC SERVICE COMMISSION OF UTAH
______________________________________________________________________________
IN THE MATTER OF
CARBON/EMERY TELCOM, INC.’S
APPLICATION FOR AN INCREASE
IN UTAH UNVERSAL SERVICE
FUND SUPPORT
CARBON/EMERY TELCOM, INC.’S
REPLY MEMORANDUM IN SUPPORT
OF PETITION FOR REVIEW AND
CLARIFICATION
DOCKET NO. 15-2302-01
______________________________________________________________________________
PROCEDURAL HISTORY
On October 28, 2015, Carbon/Emery Telcom, Inc. (“Carbon”) filed a Petition for Review
and Clarification on the Order of the Utah Public Service Commission (“Commission”) on
Carbon’s Motion for Partial Summary Judgment (“Order”). The Commission issued a
scheduling order on October 28, 2015, and set a briefing schedule on the Petition for Review and
Clarification. Pursuant to the Scheduling Order, the Division filed a response to Carbon’s
Petition for Review and Clarification on November 13, 2015. Carbon hereby files this reply in
support of its Petition for Review and Clarification pursuant to Utah Code Ann. §§54-7-15 and
63G-4-301 and Utah Administrative Code R746-100-11.
ARGUMENT
1
The Division of Public Utilities’ (the “Division”) arguments against review and
clarification actually support Carbon’s Petition by demonstrating the problems in the
Commission’s Order.
1.
The Commission’s Use of “Straight-line Depreciation” When it Likely
Intended “Single Asset Depreciation.” At the outset, the Division, in its Response indicates that
the “Commission may clarify its order to the extent that it may have made a typographical error in
using “straight line” where it apparently intended to use “single asset.” This issue is not in dispute
and should be clarified in the Commission’s Order on Review. However, it is imperative that the
Commission understand that under a group asset depreciation method, the group is depreciated in
a straight-line method.
2.
Carbon’s Process for Removing Fully-Depreciated Assets from its Rate Base.
In its Order, the Commission found that “Carbon does not propose, nor does it claim to have, a
process by which its fully depreciated assets might be removed from rate base—and its UUSF
disbursement adjusted accordingly—in years where Carbon does not apply to have its UUSF
subsidy increased or otherwise reviewed.”1 Carbon identified this as an error in the Commission’s
Order. Specifically, with group depreciation there is no such thing as a fully depreciated asset
within a non-fully depreciated group. Either the group account is fully depreciated or it is not fully
depreciated (since the group account is treated as a single asset). In its response, the Division
agrees that groups are depreciated as a whole where some assets may have longer or shorter service
lives than the group average. Further, the Division states “if group depreciation is properly
1
In the Matter of the Application of Carbon/Emery Telcom, Inc. for an Increase in UUSF, Docket No. 15-2302-01,
Order on Partial Summary Judgment dated October 15, 2015, p.3.
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implemented this does not result in unreasonable outcomes because the depreciation rate will
match the service life and the groups will never have excessive depreciated assets in them.”
Carbon and the Division are in agreement on this point. Unfortunately, however, the
Commission’s Order does not properly reflect this principle. The Commission’s Order states that
“Carbon does not propose, nor does it claim to have, a process by which its fully depreciated assets
might be removed from rate base—and its UUSF disbursement adjusted accordingly—in years
where Carbon does not apply to have its UUSF subsidy increased or otherwise reviewed.” This is
not accurate and needs to be corrected.
Further, the Division, in its response, goes on to identify two components related to the
Division’s disagreement with Carbon’s group depreciation method. The Division and the
Commission are within their statutory and regulatory authority to identify perceived errors in
Carbon’s implementation of the group depreciation method, and request adjustments to the group
method of depreciation to rectify these perceived errors. Carbon, while it may not agree with the
errors identified, does not take exception to an audit approach that seeks to make adjustments under
a group method. If the Division feels that Carbon is reviving fully depreciated groups, rather than
creating new groups, it can, and should, address this by corrections to Carbon’s groups. What
Carbon objects to, and what is beyond the statutory and regulatory authority of the Division and
the Commission, is for the Division and the Commission to discard the group method as an
acceptable method of depreciation for State Utah Universal Service (“UUSF”) purposes and
require a company to maintain two depreciation methods on the same asset with differing
percentages allocated to each method on a year-by-year basis.
3
As acknowledged by the
Commission in its Order, the Company cannot change the interstate method of depreciation
without FCC approval—which Carbon does not have.
3. Reaching a Depreciation Expense Number Using Single Asset Depreciation versus
Group Asset Depreciation. The Division also argues that “the Commission is calculating a
revenue requirement and may use any reasonable method to establish a dollar amount for
depreciation expense that is representative of the depreciation expense needed to reimburse the
company for the actual diminution in the value and useful life of its assets in the test year.” While
Carbon agrees that the Commission, in establishing a revenue requirement, can establish the dollar
amount for depreciation expense, Carbon maintains that it is unreasonable to discard a group
method of depreciation that is and has historically been used by the Company under FCC Part 32,
particularly when the group method is discarded in the middle of a State UUSF case.
The State rule, R746-340-2.D, provides that the Uniform System of Accounts, as
prescribed by the FCC at 47 CFR Part 32, is the prescribed system of accounts to record the results
of Utah intrastate operations. It is undisputed that Carbon has been using a group method of
depreciation for over 15 years. It is a matter of fundamental fairness that the regulated companies
should be aware of the rules that will be imposed against them in a proceeding on UUSF
application. The Division, in response to this, argues that the Division “has not and does not argue
that single asset depreciation is the only possible method that Carbon may use.” Moreover, the
Division states that it is not asking the Commission to require Carbon to move to a single asset
depreciation method2. However, the Commission’s Order stated “if the Commission finds credible
2
Additionally, it is Order issued on November 12, 2015, in Docket No. 15-053-01, the Commission also stated that
the Commission would be within its discretion to adopt the Division’s recommendations without ordering Strata to
change any of its record-keeping practices going forward.
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evidence that Carbon has improperly configured its asset groups, the Commission’s rules, as
currently written, allow the Commission to apply a different depreciation method to Carbon’s
assets and to adjust the utility’s depreciation expense.” This language indicates that while the
Commission acknowledges that group asset depreciation is an acceptable method of calculating
depreciation expense if performed correctly, if the Commission believes it has not been calculated
correctly, it is not bound to correct those errors using a group method—rather it can abandon the
group method and use single asset method of depreciation.
As a practical matter, if the Division and the Commission are going to use a single asset
method to calculate an appropriate depreciation expense, how is a regulated company going to
effectively determine the UUSF it is entitled to if it doesn’t calculate its depreciation expense using
the same method that will be imposed upon it by the Division and the Commission in review of
any application for UUSF? Are the Division and the Commission suggesting that a company
should keep three sets of books: 1) a set for interstate federal purposes that utilizes group
depreciation; 2) an internal set for intrastate purposes using whatever method the company deems
appropriate; and 3) a third set of books that utilizes the single asset method that the State regulators
will use to review UUSF applications? This approach is absurd and if implemented would be
overly burdensome.
However, even if Carbon were inclined to voluntarily switch to a single asset method of
depreciation for intrastate purposes, as a practical matter, as the Commission and the Division are
aware, rate of return regulated companies are required to separate their assets jurisdictionally
between interstate and intrastate jurisdictions. These separations change on an annual basis—
some years a company will have 48% of its assets assigned to the interstate side, with 52% assigned
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to the intrastate jurisdiction. The following year, the separation percentages may change, and the
company may have 51% of its assets assigned to the interstate side. If the company uses a different
method of depreciation for intrastate and interstate purposes, how will the depreciation expense of
the assets that “flip flop” between the federal and state jurisdictions be calculated accurately? This
is why it is imperative to read State rule, R746-340-2.D as implementing the interstate and
intrastate methods of depreciation into lock step. A company cannot change the interstate method
of depreciation without FCC approval, and if the method of depreciation is changed only on the
intrastate side, it will be difficult, if not impossible, to calculate accurate depreciation on a total
company basis, particularly in the annual reports the company would file with the state of Utah.
This issue is not just about Commission authority, but also about accuracy in maintaining
depreciation accounts for the Company. It would be arbitrary and inaccurate for the FCC and
Commission to require differing methods of depreciation on assets for which the percentage of
depreciation allocated to each jurisdiction may change on a year-by-year basis. The Division, the
Company, and the Commission would have no way of tracking this accurately for regulatory
purposes. It would be more prudent to read State rule, R746-340-2.D as locking a company into
consistent methods of depreciation for interstate and intrastate assets as prescribed by the FCC at
47 CFR Part 32.
The Division and the Commission stating that they are not requiring Carbon to move to a
single asset depreciation method is a matter of semantics. Regardless of whether the Commission
orders Carbon to implement a single asset method of depreciation in its daily operations is
irrelevant if the depreciation expense in a UUSF application proceeding is calculated by the
Division or the Commission utilizing a single asset method of calculation. Carbon agrees with the
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Division that single asset depreciation is one method of setting a UUSF distribution amount that
best matches Carbon’s actual ongoing costs and revenues. However, since the company does not
employ the single asset method of depreciation, but rather uses a group method of depreciation as
required by Part 32, Carbon maintains that the more prudent course of action is for the Commission
and the Division to review a companies’ application of group asset depreciation rather than
abandoning group asset depreciation in favor or single asset depreciation. This issue will be
amplified in a non-UUSF request or rate case proceeding, as the Division reviews the books of a
company using annual reports, because an in depth depreciation review is not conducted, making
it difficult or impossible to implement varying depreciation methods for interstate and intrastate
purposes on the same assets.
4. Group Assets with Different Service Lives.
The Division argues that the FCC rules reject placing assets with differing service values
in to the same groups to depreciate assets at an accelerated rate. As support for this conclusion,
the Division states that “this would be plainly inconsistent with straight-line depreciation that
should assign an equal charge for depreciation in each of the period of the service life of the asset.”
This statement disregards the fact that in a group method of depreciation, the group is treated as
one asset and a straight-line method of depreciation is applied to the group. There is absolutely no
support for the premise that the FCC requires a vintage method of group depreciation, nor is that
position consistent with industry practice.
Again, however, if the Division and the Commission believe that a company has failed to
properly consider the remaining service life of a group, there is a remedy for this that does not
require abandonment of the group method. The Division or the Commission can require a
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company to apply the “FCC Method3” to existing groups to recalculate the appropriate remaining
life of a group. Use of the FCC formula and review of group lives are methods by which the
Division and the Commission can retain use of the group method pursuant to Part 32, while
ascertaining that an appropriate depreciation expense is claimed by the company.
5. No FCC rule prohibits an asset group from including fully depreciated assets. In
its Order, the Commission states that “the FCC rule also prohibits an asset group from including
fully-depreciated assets, as the expenses associated with such an asset do not fall under the
definition of depreciation. FN 4 Part 32 refers to such expenses as “losses,” clearly
distinguishing them from depreciation expenses.” In its Petition, Carbon requests that the
Commission clarify where this “rule” is found in Part 32. In response to this request for
clarification, the Division states that retaining fulling depreciated assets in a group accelerates
the depreciation rates and does not distribute the loss in service value of property in a straight
line method during the service life of the property. The Division argues this is prohibited by the
plain language of 47 CFR 32.2000(g)(1)(i). However, as acknowledged by the Division in its
Response either a group is fully depreciated or not fully depreciated--there are no individual
assets to consider or exclude. Neither the language of Part 32, nor FCC practice, prohibits an
asset group from including fully depreciated components. Fully depreciated component that
3
The FCC Formula was identified and set forth in the Direct Testimony of Joseph Hellewell, line 223-234:
“The FCC has developed a formula that has been used to recalculate the depreciation rate based on the plants
average remaining life, future net salvage, and depreciation reserve ratio. . . The depreciation rate is calculated using
the following formula:
Depreciation Rate= 100%-Accumulated Depreciation%-Future Net Salvage%
Average Remaining Life”
Additionally, 47 CFR Part 32.2000(g)(1) provides:
(ii) In the event any composite percentage rate becomes no longer applicable, revised composite percentage rates
shall be computed in accordance with paragraph (g)(1)(i) of this section.”.
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continue to be used in operations remain in the plant account until the component has been
disposed of. Regular accounting methods, fully account for the “fully depreciated” nature of the
component by use of the depreciation expense account. Because a fully depreciated component
has a net book value of zero, it has no effect on the rate base. The Commission’s Order
erroneously seems to state that a fully depreciated asset should be removed from a plant account
because it is fully depreciated. Carbon requests that the Commission clarify and correct this in
the Order on Review.
CONCLUSION
Carbon respectfully requests review and clarification on the issues identified herein.
Dated this 23rd day of November, 2015.
BLACKBURN & STOLL, LC
Kira M. Slawson
Attorneys for Carbon/Emery Telcom, Inc.
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CERTIFICATE OF MAILING
I hereby certify that a true and correct copy of the Carbon/Emery Telcom, Inc.’s Reply
Memorandum in Support of Petition for Review and, Docket No. 15-2302-01 was sent to the
following individuals by email and/or mailing a copy thereof via first-class mail, postage prepaid
(as indicated), this 23rd day of November, 2015:
Justin Jetter
Assistant Attorney General
Division of Public Utilities
jjetter@utah.gov
Robert Moore
Assistant Attorney General
Office of Consumer Services
rmoore@utah.gov
Chris Parker
William Duncan
Dennis Miller
Joseph Hellewell
Paul Hicken
Division of Public Utilities
chrisparker@utah.gov
wduncan@utah.gov
dennismiller@utah.gov
jhellewell@utah.gov
phicken@utah.gov
Michele Beck
Danny Martinez
Office Of Consumer Services
mbeck@utah.gov
dannymartinez@utah.gov
Bion C. Ostrander
Ostrander Consulting
bionostrander@cox.net
David Brevitz
Ostrander Consulting
davidbrevitz@att.net
Kira M. Slawson
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